TURKEY'S FINANCE MINISTER REITERATES COMMITMENT TO

C O N F I D E N T I A L ANKARA 002041 SIPDIS SIPDIS TREASURY FOR CHRIS PLANTIER E.O. 12958: DECL: 04/13/2016 TAGS: EFIN KTFN TU SUBJECT: TURKEY'S FINANCE MINISTER REITERATES COMMITMENT TO ECONOMIC PROBITY REF: ISTANBUL 392 Classified By: DCM Nancy McEldowney. Reasons 1.4 (b) and (d). ¶1. (C) Summary. In a wide-ranging April 11 conversation, Finance Minister Unakitan told Ambassador that Turkey's government remains committed to fiscal discipline, sound economic policies, and structural reforms, welcoming the fact that Ambassador had come to him rather than rely on distorted articles in the press. The Minister reiterated his government's commitment to the independence of the Central Bank and said that a recent tax break targeted at the textile sector would either be revenue neutral or increase tax revenues. He said he welcomes opportunities to explain Turkey's policies to foreign investors in the United States or Europe. The Minister said that he expected legislation criminalizing terrorism financing to move through Parliament quickly and that he was open to further discussion of recent tax changes that would make it more difficult for Turkish companies to raise capital in U.S. financial markets. End Summary. -------------- -- CENTRAL BANK INDEPENDENCE AND FISCAL DISCIPLINE -------------- -- ¶2. (C) Ambassador observed that recent economic policy decisions -- nominating the head of a no-interest, "Islamic" bank to head the central bank (which was vetoed by President Sezer) and value added tax (VAT) cuts for the textile sector that were criticized by the IMF -- had raised questions in business circles about the government's commitment to the successful policies of the last four years. Unakitan averred that, to the contrary, the government remained as committed as ever to fiscal discipline and specifically to the 6.5% of GDP target for the primary budget surplus that was agreed with the IMF. Fiscal discipline would continue, he said, not for the sake of the IMF, but because the government shared the view that it is in the best interest of Turkey. ¶3. (C) Continued progress on structural reforms was also necessary, the Minister said, to make permanent the recent progress on inflation, growth, and government debt ratios. He noted that the Government had accelerated the legislative calendar to allow for rapid approval by Parliament of key social security reform legislation (septel). He said that one of the most important structural reforms was the �A;independence of the Central Bank, which was also in Turkey's interest. He argued that the Islamic banker the government had nominated to the President, Adnan Buyukdeniz, was a strong and independent figure. He is such a strong character, Unakitan said, that it might even be a good thing that the President rejected the nomination because otherwise he could have become a problem for the government. The Minister added that it was the government's belief that independent regulators needed to be strengthened so that their independence relied on institutional factors rather than individual personalities. -------------- NO MORE SPECIAL TAX BREAKS -- THIS YEAR -------------- ¶4. (C) On the VAT cuts for the textile sector, Unakitan said that the special role of the sector in Turkey's economy needed to be considered. As well as being a large sector, much of the sector is outside the formal economy and does not pay tax at all. In fact, he had noted that VAT payments refunded to textile exporters exceeded tax receipts from the sector. He believed that a rate cut would reduce "fraud and leakage" by encouraging companies to move into the registered, tax paying economy, with the result of greater tax collections and smaller refunds. ¶5. (C) The textile sector was a special case, the Minister said, and the government has made it clear to other sectors that there would be no more such tax breaks in 2006. However, other sectors, such as the tourism sector were suffering from a disadvantage competing with other tourism destinations in the Mediterranean that had lower VAT rates on tourism services. Thus, the government was prepared to discuss a VAT reduction for tourism in the 2007 budget -- if the budget will allow. Unakitan also noted that the government had recently increased some taxes, such as the special consumption tax on bio-diesel fuel. "My goal is a 6.5% primary surplus, within this we can plan," the Minister concluded. -------------- -------------- CURRENT ACCOUNT AND UNEMPLOYMENT BIGGEST CHALLENGES -------------- -------------- ¶6. (C) Unakitan said the two biggest economic challenges the government faces are the current account deficit and unemployment. The growth in the current account deficit is partially due to energy prices and increased import needs, but the remedy is not tax cuts or other short term measures, it is structural reform that increases productivity in exporting sectors. Such reforms would also encourage greater foreign direct investment, which would create jobs and ease the transition as the agricultural sector shrinks and the services sector grows. He reiterated that structural reforms, not short-term measures, were how the government was addressing these challenges. ¶7. (C) Ambassador replied that this was an important and reassuring message that was not clearly understood by the international investor community. He encouraged Unakitan to find opportunties to address investors in places like New York and London in order to protect Turkey's reputation for good economic management. Returning to the comment about distortions in the Turkish press, Unakitan said he had spoken to investor groups in the past and would be happy to do so again, and would appreciate Ambassador's recommendations. He thought he could be most effective after Economy Minister Babacan returns from his trip to the United States for the IMF/World Bank Spring meetings later this month. -------------- --- STICKING WITH PRIVATIZATIONS DESPITE ALLEGATIONS -------------- --- ¶8. (C) Asked by Ambassador how the government plans to pursue the privatization process, Unakitan said the government's goal was that all economic activity be conducted by the private sector, not the government. Noting continued government holdings in the transportation, fuel, sugar, cement, and fertilizer sectors, he said there was still a lot to be done. The government's immediate priorities are selling the three state-owned banks, Turkish Airlines, the National Lottery, the petrochemical company Petkim, and other energy holdings. Alluding to the allegations in the press of improprieties by him in past sales, Unakitan said that privatization is controversial, and that the job of a finance minister is a tough one. "Everyone accuses me," but he will stick with it, the Minister said. -------------- READY TO DISCUSS WITHHOLDING TAX PROBLEMS -------------- ¶9. (C) Ambassador said he understood from some U.S. companies that the implementation of a new withholding tax on financial instruments was causing unintended difficulties, notably for the ability of Turkish companies to issue American Depository Receipts in U.S. financial markets (reftel). Unakitan said that plans for the tax had been announced in 2004, so companies should not have been surprised by the new regulations. However, his Ministry would be pleased to meet with affected parties and develop acceptable solutions. He referred the companies to the Revenue Administration for followup. -------------- SPEEDING UP TERROR FINANCE LAW -------------- ¶10. (C) Finally, Unakitan told Ambassador that he is closely following Parliament's progress in enacting a draft law that would criminalize terrorist financing and strengthen the powers of Turkey's Financial Intelligence Unit. He said that both he and the Foreign Ministry were working the issue and that they had jointly asked the the Parlimentary sub-commission to speed up its work. Unakitan was hopeful that the bill would be passed into law shortly after enactment of the social security legislation, agreeing with Ambassador's statement that this was very important legislation for our joint work against al-Qaida and the PKK. -------------- COMMENT -------------- ¶11. (C) Post will continue to pursue the withholding tax issue and ensure that the Ministry follows through on Unakitan's promise to consult with affected companies, as well as to highlight the urgent need for terrorism finance legislation. We will also consult with Unakitan's staff on how he could most effectively ensure that investors are aware of Turkish economic policies. Visit Ankara's Classified Web Site at http://www.state.sgov.gov/p/eur/ankara/ WILSON